Half Measures

China’s central bank finally reduced the key policy interest rate on Tuesday, the medium-term lending facility (MLF) rate—but did so by only 5 basis points. This half measure was a compromise between the competing forces confronting the PBOC: the need to take more aggressive steps to offset weakening cyclical momentum and rising deflation, and the concern that lower interest rates will only boost property speculation. Additional rate cuts and lower corresponding loan prime rates (LPR) will be necessary, and forthcoming in the next two quarters.

Following the rate cut, the central bank also apparently intervened to strengthen the currency to prevent speculation on faster yuan depreciation and additional capital outflows, following the same pattern of PBOC behavior after the September 6 required reserve ratio (RRR) cut.

Posted November 10, 2019
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